The Loan-Mod Myth

This whole loan-modification thing is getting out of hand.

Are we really so easy to manipulate, or are desperate people just clutching at anything to keep from falling?

So many homeowners on the verge of losing their homes will do anything, listen to anyone, take any advice, as long as it's authoritative and the answer satisfies their wants. Why? Because even a flicker of hope can renew the enthusiasm of a condemned man. Problem is, loan mods, for the masses, are a Band-Aid on cancer.

But the voice of reason is drowned out by the shouts for rescue.

I'm all for hope, but it has be accompanied by action and a dose of reality. Homeowners in distress hope for miraculous results -- a loan mod that reduces the amount they owe and cuts the interest rate to below-market levels. Reality is, if you don't have a job, do you really think the bank is going to let you keep the house? Urban myths perpetuate the misplaced optimism. ("My uncle's accountant's niece found a non-profit that is 'getting good results' on loan mods.") And so, merrily they go, off to slaughter.

Sure, a precious few who fit the narrow guidelines and have their flawlessly completed applications fall on the right person's desk on the right day will reap rewards. It's happened for a little over 300,000 people. But the vast majority of applicants who are granted 3-month or 6-month trial modifications will never see permanent loan mods. Many shouldn't even be put through the trial programs. When their debt-to-income ratio with the trial payment is well above 50 percent? When they're unemployed? When they're drowning in unsecured debt and can barely afford to keep food on the table the lights on? I've talked to people who got the go-ahead for trial modifications with payments at nearly 90 percent of their take-home pay. That's frickin' ridiculous.

Less than 1 in 4 people who make it through trial payment programs actually get a permanent mod. And then 75% of those end up defaulting again within a year. Why? Because changing someone's payment doesn't change their habits. And the banks know it. But they can keep on collecting payments from those desperate souls who cling to the dream that they will be among the lucky few. And those homeowners will keep right on paying, even go farther into debt or worse to keep up their end of the bargain. Only to be crushed by a one-page letter summarily denying their application and requiring them to make up the back payments.

Here's the kicker: While these mod programs are running their course, so is the foreclosure. And so many times, riding shotgun with the modification denial is a notice of trustee sale. At that point, it's game over. Too late to attempt the other options, which were more likely to succeed, given the time. Options that were the most pragmatic, given the facts.

People who could have done a short sale, for instance, lose their home to a foreclosure, preventing them from buying another home for 5-7 years -- at the bottom of the market -- and gutting them emotionally. The banks actually lose more money than they would have had the property been liquidated in a short sale. The neighbors on the block suffer from a blighted home and further-reduced property values.

And everyone wonders what went wrong?

The voices are wrong. We have to make better decisions, based on facts and experience and the guidance of those with proven success. Not on the Pollyanna-ish opinions of those who don't have a stake in the decision. Don't buy in to the misguided claims of lawmakers who just want to keep their jobs. Don't listen to scamming companies who take an upfront payment to process your loan modification when your gut is telling you it isn't going to fly. Don't blindly follow the suggestions of your friends and neighbors. And don't let anyone keep you from doing what you know is the right thing in the long run. There's too much at risk.

We're adults and we have to start acting like it.

 

(Brian Bean is a real estate broker and ambassador for Helping A Million Homeowners, a nationwide organization that is committed to helping alleviate the financial stress that so many homeowners face today. He can be reached directly at Brian@BigDreamInc.com.)

 

Brian Bean
Real Estate Professional
www.IEShortSalePros.com
www.HelpingAMillionHomeowners.com

I've been specially trained to negotiate short sales with an emphasis on deficiency waivers.

"If one advances confidently in the direction of his dreams, and endeavors to live the life which he has imagined, he will meet with a success unexpected in common hours." - Henry David Thoreau